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Citi Prime Finance’s 2011 IT Trends & Benchmarks Survey
From a sequencing perspective, it is typically after these core
investments have been made that a manager then begins to
focus on building customized data management and investment
decision-making tools to enhance their focus on alpha creation.
Benchmark data shows that in 2011, large hedge fund managers
will focus the majority of their IT software budget (36%) on
realizing the differentiation inherent in these tools. On average,
dollars spent on these capabilities more than quadruple as a
hedge fund manager moves from the small and medium to the
large AUM category. Franchise frms spend even more—again
doubling the size of their investment to realize the differentiation
available with these advanced functions.
TrackingMovement in the Buy versus Build Threshold
Once a manager understands which software capabilities they
should be focusing upon, the fnal decision they must make
to optimize that investment is whether they should look to
“buy” or “build” that functionality. To be clear, in this context
buying such functionality can relate to either licensing a vendor
application or paying to have an outsourced service provider
manage this function on their behalf. Build refers to having in-
house developers or external IT developers who have been hired
on a consulting basis create proprietary applications.
Chart 14 lays out the major categories of software hedge fund
managers consider in creating their core platform. Each type of
software is positioned by the relative complexity of its functions
and by the hedge fund’s relative need to customize such
solutions to obtain differentiation. A third dimension of time is
also applied to the chart. This is represented by movement of
the “buy versus build threshold.”
Back in 2000-2003, only the most rudimentary and simplistic
CRM platforms existed behind the buy- versus-build threshold.
All other functionality a hedge fund would have considered
core to their investment approach were to the right of this line,
indicating that building custom solutions was the most viable
path to obtain those capabilities.
In these years, hedge funds relied almost universally on
technology provided to them by their prime brokers for trading
and for understanding their portfolio holdings. These were
the years that Wave 1 pioneers had opted to “build” their own
platforms in the trading and portfolio management to achieve
differentiation. As their efforts peaked and the commoditization
of such capabilities began to occur, the buy versus build
threshold shifted to the right.
Between 2003 and 2007, new entrants coming to market were
starting to have options that called into question their need to
build trading or portfoliomanagement solutions. By 2008, there
were enough offerings available to emerging funds—either from
new entrants or from traditional providers having upgraded
their offerings—that for the majority of hedge funds, there was
no longer a need to consider custom building these functions.
Indeed, the emergence of middle-offce outsourcing providers
offered hedge funds emerging post-2007 a route to market that
did not even require them to invest in portfolio management
software at all, and yet still enjoy advanced capabilities.
Benchmark data underscores this dramatic change in approach.
Small, medium and large hedge funds showed a signifcant
preference for buying their trading and portfolio management
platforms, while the majority of franchise frms continued
to build these capabilities. At one end of the spectrum were
small hedge funds that preferred to buy rather than build a
trading solution, 64% to 36%, and a portfolio management
solution, 79% to 21%. At the other end of the spectrum were
franchise frms whose buy-versus-build ratios were 41% to
59% for trading applications and 48% to 52% for portfolio
management platforms.
Marketing &
CRM Tools
Trade / Order
Management
Compliance
Portfolio
Management
Financing &
Collateral
Management
Data
Management:
Investment
Decision-
Making Support
Risk
Management
“BUY”
“BUILD”
Low
High
Need for Customization
Chart 14: Determining Buy vs. Build Approach